The Impact of Equity Investment by Commercial Bank on Insurance Company's Performance: Evidence from China

Bancassurance is a strategic partnership between banks and insurance companies in the financial service market seeking for more integrated operation. According to international experience, there are mainly 4 models for banking-insurance cooperation, including distribution agreements, strategic alliances, joint ventures, and financial group. While distribution agreements are widely used between most banks and insurers, the joint venture model and financial group model symbolize a more mature relationship between the two types of financial institutions. Bank-related insurance company in China is still in its infancy. On November 26, 2009, the CBRC issued a regulation allowing commercial banks to make equity investment on insurance companies, which was previously banned. Since then, the Chinese insurance industry has witnessed a significant growth in bank participation. According to corporate finance theory, equity investment will affect a firm's performance through several channels. Specifically, the bank-related insurance companies are expected to have better performance due to the enhanced solvency, reduced agency costs, and improved corporate governance. Our paper aims to provide empirical evidence to the theory. We first analyze the factors affecting the performance of the bank-related insurance companies. Then, using a panel date of Chinese banks and life insurers from 2005-2013, we examine the impact of bank participation on insurer's performance by both univariate and multivariate analysis. Finally, we identify several critical issues in the ongoing development of bancassurance based on our data analysis and provide some valuable suggestions for the bank-related companies and regulators.